How is a Chapter 13 plan determined?

In general, the law requires that you submit all of your disposable income to the Chapter 13 Trustee for payment to creditors over the course of your plan. However, regardless of the Debtor’s disposable income, the total amount of payments made to the to the Trustee over the course of the Chapter 13 plan may not be less than creditors would have received if a Chapter 7 liquidation petition was filed. This is known as the Best Interests of Creditors Test. This is determined by calculating the value of the assets that are not protected under an exemption less the estimated costs of administration of the Chapter 7 trustee.

Next, a Chapter 13 means test is applied to determine if your monthly income is above or below the median for your state for similarly situated households. Your income is determined by the six (6) month average of monthly income from all sources prior to filing for bankruptcy. This is known as the Best Efforts Test. If your income is above the median, the plan payment will be determined by your monthly disposable income. Calculating your disposable income is complicated, but is generally determined by subtracting allowable expenses set by the Internal Revenue Service National Standards (which may be different than your actual expenses), domestic support obligations, and qualified charitable contributions from your income.

Once the Best Interest of Creditors and Best Efforts Tests are applied, it must be determined which test yields the greater amount. The Chapter 13 Plan must provide the greater amount to unsecured creditors over the course of the Chapter 13 plan. The plan must also provide for payment in full of priority claims and generally provide for payment of the value of secured claims on personal property. Determining a plan payment under Chapter 13 is a very complicated process. A successful Chapter 13 case requires an experienced bankruptcy attorney.

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